Why a Board?

My latest TCS column is Why have a Board of Directors?:

Why aren’t corporations run using direct democracy—putting all major corporate decisions, including the choice of a new CEO, to a shareholder vote? Or by absolute corporate monarchy—allowing management to make all the decisions without oversight?

FILED UNDER: Economics and Business
Steve Bainbridge
About Steve Bainbridge
Stephen Bainbridge is the William D. Warren Distinguished Professor of Law at the UCLA School of Law and the longtime proprietor of the law blog Professor Bainbridge. He did a guest stint at OTB in November 2006. Follow him on Twitter @ProfBainbridge.

Comments

  1. DC Loser says:

    I take it you are asking this with tongue in cheek? I think we all know the real answer, and that is most public corporations are not run for the benefit of the shareholders, but rather the company executive suite members and their allies and/or patsies on the board of directors. This is a very convenient setup that’s been used to give the executives all kinds of nice compensation packages, perks, and golden parachutes. Just look at what Dennis Kazlowski (sp?) did with his board at Tyco.

  2. Steven Plunk says:

    Shareholders would not trust direct democracy or absolute monarchy. Direct democracy could turn into mob rule or shareholders could try and micro-manage a business they have no expertise to manage. Could you trust other shareholders or should you trust other shareholders to be managers?

    A monarchy brings in trust issues as well. Could you trust someone who would not be accountable to anyone? What about possible abuses of power? Mental breakdowns?

    The traditional answer is something we are all accustomed to, representative democracy through an elected board of directors. Enough control to feel empowered but insulated enough to let experts run the company. It has served us well but needs to be updated.

    Just like our political representative democracy the elected officials (directors) are subject to material temptations, the intoxication from power, and sometimes just indifference. Improvements should be made in the accountability of directors for malfeasance and negligence. If they don’t want to serve under those conditions then so be it.

    The recent corporate scandals resulted in a lot of press for shamed corporate executives but I heard nothing of directors who are the link between shareholders and the company itself. Negligence of the magnitude exposed should have been punished. Board members got off free.